Trouble in River City......with a capital "T" and that rhymes with "D"

[Dover]

and that spells DEPRESSION.


As bankers curb lending and borrowers shy away from more debt, forced hedge-fund deleveraging is creating a massive overhang of securities to sell. We may be at the start of a prolonged credit and economic adjustment that has the hallmark of depression rather than recession.

------------------------------

(Long article in Asia Times)

...The question remains: how much will the Chinese, Indians, Russians, American consumers and others be willing to pay for wheat and other vital commodities? For energy? For stores of value such as gold, silver and the other (increasingly) precious metals in an age of unregulated, unrestrained, unanchored, electronic-based, securities-based, and market-driven global "money" and credit. With trillions of dollar liquidity sloshing vagarious ly around the global financial "system", there is clearly more than ample high-octane inflationary fuel to destabilize markets for myriad essential things of limited supply. And, increasingly, there is talk of problematic margin calls and derivative-related issues impacting commodities trading conditions. The talk is of trading dislocations and nervous "bankers" pulling away from the financing of hedging activities in various markets. Or, in short, we are witnessing a precarious ratcheting up of monetary disorder - in a multitude of key markets and on a global basis.

At the heart of monetary disorder, we have a leveraged speculating community increasingly on the ropes. January was a tough month for the hedge fund community. In particular, it appears the (over hyped) "long/short" (holding both long and short positions) and (over hyped) "quant" funds had an especially tough go of it. To begin the New Year, last year’s favorite stocks (ie technology, emerging markets, energy, and utilities) were hammered, while the heavily shorted sectors have significantly outperformed (ie homebuilders, banks, retailers, "consumer discretionary", and transports). The yen and Swiss franc (currencies traders had shorted to finance higher yielding "carry trades") have rallied. Even the dollar has rallied somewhat. Many speculators have been (caught) short commodities, having expected negative ramifications from the bursting of the US credit bubble. Others have been caught over-exposed to emerging equities and debt markets. And, increasingly, it appears various trades throughout the complex corporate credit arena have run amuck.

Friday, various indices of corporate credit risk moved to record highs, including the previously stalwart "investment grade" sector. Leveraged loan prices fell to record lows late in the week, as talk of further bank and hedge fund liquidations captivated the marketplace. While the status of the (monoline) credit insurers is now a central focus, behind the scenes there is increasing angst at the prospect for a disorderly unwind of various leveraged trading strategies in corporate credits and credit derivatives. "Synthetic" CDOs (collateralized debt obligations) - pools of credit default swaps and other derivatives - are especially vulnerable and problematic for the system. In short, the corporate credit crisis took a decided turn for the worse this week. There is, with the economy sinking rapidly and the leveraged speculating community faltering abruptly, little prospect at this point for stabilization. The downside of the credit cycle is attaining overwhelming momentum.

The Wall Street punditry seems to go out of its way to get things wrong. The latest talk is that the market will simply look over the "valley" and begin focusing on a recovery from what will be, at worst, a brief and mild recession. The relative strong performance of the banks, retailers, homebuilders, and transports is accepted as confirmation of the bullish view. I’ll instead take the view that the recent major squeeze in the heavily shorted stocks and sectors is only further destabilizing and indicative of dynamics troubling to the leveraged speculating community and the credit system more generally. "Hedges" have stopped working, creating a backdrop of angst and forced liquidations.

...snip...

As an economic and financial analyst (as opposed to fear-monger), I feel it is imperative to highlight that it is more technically accurate to categorize the unfolding scenario in the historical context of an economic depression rather than recession. This is certainly not shaping up as a short-term inventory-led economic adjustment or mid-cycle slowdown. Instead, we have now entered the very initial stages of what will likely prove a deep, prolonged and arduous adjustment to the underlying structure of our credit and economic systems....cont'd


http://www.atimes.com/atimes/Global_Economy/JB12Dj02.html